Negative churn – an introduction
The software-as-a-service (SaaS) industry has witnessed explosive growth over the past decade. As more businesses adopt subscription-based models, understanding customer retention and revenue growth has become critical. One often-overlooked metric that plays a vital role in gauging the health of a SaaS business is negative churn. We will look at the basis of negative churn, its importance as a metric, and how to calculate it.
What is negative churn?
Negative churn is a metric used to measure customer retention, expansion, and revenue growth within a SaaS or tech business. Unlike traditional churn (which represents the rate at which customers cancel their subscriptions), negative churn signifies a net gain in revenue from existing customers over a given period. This gain can result from upsells, cross-sells, or subscription renewals, outweighing any losses from customer cancellations or downgrades.
Why is negative churn so important?
Negative churn is essential for several reasons:
- Revenue growth: Negative churn indicates that a SaaS business is expanding its revenue from existing customers faster than it is churning. This leads to increased profitability and a more robust business model.
- Customer satisfaction: A negative churn rate typically means that customers are finding value in the service, upgrading their plans, or purchasing additional features. This is an excellent indicator of customer satisfaction and product-market fit.
- Market and product growth: Businesses that achieve negative churn can reinvest their increased revenue into product development, sales, and marketing efforts, accelerating their growth and market share.
What is a good negative churn?
A good negative churn rate should ideally be greater than the traditional churn rate. This means that the revenue gained from existing customers outweighs any losses from customer cancellations or downgrades. A higher negative churn rate suggests a strong product-market fit, satisfied customers, and a healthy business model.
While the ideal number may vary depending on the industry and business model, achieving a negative churn rate of 10% or higher is generally considered to be exceptional.
Negative churn isn’t something typically publicly available from other successful businesses. As an example, Slack, before acquisition by Salesforce, reportedly had a negative churn rate of around 15%.
What does negative churn look like?
How do you calculate negative churn?
The formula to calculate negative churn is:
Negative churn rate (%) = ((Expansion revenue – Churned revenue) / MRR at start of period) x 100
The result is expressed as a %.
You can also calculate negative churn by deducting churn from expansion, i.e. the difference between the two amounts gives you the negative churn.
To set out the calculation in more detail, the steps to calculating negative churn are:
- Determine the revenue from existing customers at the beginning of a specific period (e.g. monthly or quarterly).
- Calculate the revenue lost due to cancellations and downgrades during that period.
- Calculate the revenue gained from upsells, cross-sells, and renewals during that period.
- Subtract the revenue lost from the revenue gained.
- Divide the result by the initial revenue from existing customers.
- Multiply the result by 100 to express it as a percentage.
Negative churn worked example:
If a SaaS business has £100,000 revenue at the start of the month and expansion of £10,000 from upsells and contraction of £5,000 from cancellations, negative churn would be calculated as follows:
Negative Churn Rate (%) = ((£10,000 - £5,000) / £100,000) x 100 = 5%
Conclusion
Negative churn is a crucial metric for SaaS and tech businesses, as it provides insight into customer satisfaction, revenue growth, and overall business health. By monitoring and striving to improve negative churn, businesses can build stronger relationships with their customers and drive sustainable growth in an increasingly competitive market.
